Author

Daniel Bustamante

I wanted to discuss the idea of portfolio management today. What it means, how to execute it and why it makes a difference in investing.

If you've spent anytime reading through the blog posts on the site, watched the over 80+ YouTube videos or attended some (for some of you all of them) our free webinars then you know that we don't day trade. Sure, a little bit on the futures markets, but generally, we do not day trade. Why? Because of situations like we're about to be in here on the markets: Situations where the markets are selling off and are setting up for sell offs. What good does it do to sit here and day trade E-Mini for 2 points when AMZN, QQQ and VXX (to name a few) are going to move large percentage points? What good does it do to trade a micro lot Forex for $50 when the market has a portfolio shift? It doesn't, and this is the reason why many will never capture a large trade.

However this is the same reason that during the night of the US Presidential Election that some of the students cleared $7K+ each on ES/GC and Yen Futures. It's the same reason that TraderJake was able to clear $120,000 during Brexit. It's the same reason that last Friday that I was able to capture a $1,000 VXX trade using about $300 in capital. Don't confuse this with bragging, it's not, it's to show you proof that it's during large market shifts where big trades can be made.

The point being, portfolio management makes a big difference when the markets get volatile and it's the difference from having to grind it out day to day to getting those big account bumps that make it all worth it.

What is portfolio management?

Well there's a few definitions but let's cover to what I believe it to be. Portfolio management is a way to structure a set of trades in your book/account to capture large price moves. It's also learning to use multiple tools (futures/options) to be able to exploit situations where a swing trade is not readily available. It's understanding how to use volatility in your favor. It's understanding when to simply buy index puts in the event of a sell off.

How do you execute it?

By the price charts and understanding how the markets work. The ETF's SPY, QQQ, IWW and VXX are literally the most direct ways to trade the entire market and volatility as a whole and I never see the day traders discuss them. I also never see the day traders (futures or momo stocks) have massive trades or discuss how they 'caught the sell off' - why? Because they're too focused on the micro picture of the global markets. In 1987 Paul Tudor Jones had one of his largest years ever in trading. Why? Because he was positioned for a market sell off. He wasn't day trading futures for 1 point at a time or staring at a 1 minute chart of PLUG or AMD while monitoring the 9, 10, 20, 38 and 50 SMA. It came from understanding the price chart and from that came an understanding of what products to use to capture a large price move lower.

Let's dive deeper, you need to look at using the right products. The ones below are three that I like. I currently have short positions in 2-3 of them.

​Below are three different charts, click on them to expand them.

Now obviously with this we're not discussing fundamentals of a company but rather fundamentals of how markets work. We're also not looking at individual stocks and asking 'what are their revenues' or what products are they coming out with. No, we're looking at the markets at a whole and we're simply trading the large market shifts. Is this my only strategy? No. But it's part of an overall strategy of understanding how markets work and knowing when to use something like this v. scalping Crude oil futures for 30 cents. When you look at IWM currently, it's yet to sell so there is divergence, and usually, when one index leads the others tend to follow. But the question that I always ask is what index do I short? There is never really one answer, it depends on the market environment and most importantly, what the chart looks like.

Right now QQQ has been on a rocket ship higher so using that for a short is ideal. And the fact that IWM has yet to follow the leader, makes it ideal as well. Why? Because we're speculating here. I'm speculating that IWM follows the others when the entire market sells off. While most wait for some 'signal' I think its best to think ahead of the curve and visualize what could happen and put the trade on, so that when it does happen, you're not late to the party.

So one of the ways you execute on this as mentioned above is through the ETF's. I don't prefer call spreads here, though I know some of you do because you 'want to trade like the house' because 'the house always wins' but large market shifts are just that: LARGE. They intention for me is to capture the large market moving through directional options, and my personal favorite, futures. If you have trouble holding for large futures moves (I tend to) the directional options make it a bit easier to capture the larger market move on that index. I like RUT and IWM both, it just depends on the spread of RUT at the current market time to as whether or not I decide to use it.

How does this make a difference with investing?

I'll leave you to some of your own conclusions from reading this but allow me to give a few of my own. First, it takes you away from the stock picking school of thought, you're no longer Warren Buffet sifting through financials but actually the real Warren Buffet, using options to make money.

Second. Markets fall faster than they climb. We've had a massive bull run here and a pull back is inevitable. But here's the spoiler alert: You're not going to put just one trade on and catch the entire move and retire. You're going to have to make multiple trades, throughout the market waves. The good news is that it becomes more straight-forward when you can direct those trades at a few stock indices and Index ETF's instead of trying to find individual stocks to trade.

If this feels like it's 'advanced' at all, it's because it is. You have to get through understanding how price charts work and how to know when to execute larger position trades vs. the daily grind set ups.

Heading into the fall I am going to bring back the application based only Bullshark Mentoring Program. I'll discuss more on this later but there will be an application and a required $25,000 minimum account/brokerage balance as we'll be discussing swing trading stocks, futures (requires overnight margin) and options that cost more per trade.

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